Legislature(2011 - 2012)SENATE FINANCE 532

03/26/2012 09:00 AM FINANCE

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09:11:23 AM Start
09:13:14 AM SB192
10:57:03 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 SENATE FINANCE COMMITTEE                                                                                       
                      March 26, 2012                                                                                            
                         9:11 a.m.                                                                                              
9:11:23 AM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Stedman called the Senate Finance Committee                                                                            
meeting to order at 9:11 a.m.                                                                                                   
MEMBERS PRESENT                                                                                                               
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Dennis Egan                                                                                                             
Senator Donny Olson                                                                                                             
Senator Joe Thomas                                                                                                              
MEMBERS ABSENT                                                                                                                
Senator Lesil McGuire, Vice-Chair                                                                                               
Senator Johnny Ellis                                                                                                            
ALSO PRESENT                                                                                                                  
Bryan  Butcher, Commissioner,  Department Of  Revenue; Donna                                                                    
Keppers, Audit Master, Tax  Division, Department of Revenue;                                                                    
William  C.  Barron,  Director, Division  of  Oil  and  Gas,                                                                    
Department of Natural Resources;                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
Merlin Wibbenmeyer, Independent Contractor, Department of                                                                       
Revenue; John Larsen, Tax Division, Department of Revenue;                                                                      
SB 192    OIL AND GAS PRODUCTION TAX RATES                                                                                      
SENATE BILL NO. 192                                                                                                           
     "An Act relating to the oil and gas production tax;                                                                        
     and providing for an effective date."                                                                                      
9:13:14 AM                                                                                                                    
BRYAN   BUTCHER,   COMMISSIONER,  DEPARTMENT   OF   REVENUE,                                                                    
testified that the  change from a gross tax to  a net tax in                                                                    
2006,  as  well  as  changes  made  to  Alaska's  Clear  and                                                                    
Equitable  Share (ACES)  in 2007,  slowed the  collection of                                                                    
in-depth   information  and   evaluation   of  current   oil                                                                    
activities  on   the  North  Slope.   He  shared   that  the                                                                    
information had  finally been compiled and  divided into two                                                                    
branches. One  was a five-year  review of activities  on the                                                                    
North Slope;  the department  had encountered  difficulty in                                                                    
acquiring  the information  because  companies recorded  the                                                                    
data in  categories and  sub-categories that  were difficult                                                                    
to  separate  into  necessary   detail.  The  second  branch                                                                    
involved   categorizing  the   information   in  an   easily                                                                    
understandable format.  He relayed  that the  department had                                                                    
entertained  meetings   and  workshops  with   the  involved                                                                    
companies in  an attempt  to move  forward as  seamlessly as                                                                    
possible.  He believed  that 2012  would be  the first  year                                                                    
going  forward  that  the   detailed  information  would  be                                                                    
available, which would result  in the availability of actual                                                                    
necessary information  by March 2013. He  continued that the                                                                    
attempt  to   fill  the  data  gaps   had  strengthened  the                                                                    
Department   of  Revenue's   (DOR)  relationship   with  the                                                                    
Department  of Natural  Resources (DNR)  and the  Alaska Oil                                                                    
and Gas  Conservation Commission (AOGCC). He  explained that                                                                    
DOR had  compiled the information  while implementing  a new                                                                    
tax revenue  management system. The  system would  allow DOR                                                                    
to integrate the more detailed categories immediately.                                                                          
9:17:09 AM                                                                                                                    
DONNA  KEPPERS, AUDIT  MASTER, TAX  DIVISION, DEPARTMENT  OF                                                                    
REVENUE,  presented   the  PowerPoint   Presentation:  "Data                                                                    
Assessment Project  Access to Information." She  pointed out                                                                    
to the committee the Index on Slide 2:                                                                                          
     •Project purpose and goals                                                                                                 
     •Accomplishments to Date                                                                                                   
     •Project Approach                                                                                                          
     •Five Focus Areas                                                                                                          
     •Cost Information Gathering Process                                                                                        
     •Data Assessment - Over the Past Year                                                                                      
     •Capital Expenditure Categories                                                                                            
     •5 Year Look Back Overview                                                                                                 
     •Data Assessment - Next 15 Months                                                                                          
     •Data Assessment - Future 2014 Forward                                                                                     
     •Benefits of the Project                                                                                                   
     •Next Steps                                                                                                                
     •Handout List                                                                                                              
     •Industry Information Catalogue                                                                                            
     •SB 192, Amendment 26 Comparison to Currently                                                                              
     Collected Data by Agency                                                                                                   
9:18:10 AM                                                                                                                    
Ms.  Keppers looked  at slide  3,"  Data Assessment  Project                                                                    
Purpose and Objective":                                                                                                         
     Purpose:  to establish  the  foundation  of data  types                                                                  
     required   by  the   department   for  establishing   a                                                                    
     centralized, reliable,  secure, and  automated database                                                                    
     of oil and  gas production and tax  information for DOR                                                                    
     to evaluate tax  obligations, have efficient reporting,                                                                    
     have full compliance  form producers/explorers, and for                                                                    
     data  integration into  more  advanced information  and                                                                    
     revenue management systems.                                                                                                
     Objective: to  assist in  the design,  development, and                                                                  
     implementation  of  standardized reporting  forms  from                                                                    
     industry leading to  the development and implementation                                                                    
     of a  standardized and automated collection  of oil and                                                                    
     gas  production volume,  value, expense,  credits, cost                                                                    
     forecasts  and  revenue   information  to  address  tax                                                                    
     related  oil and  gas economic,  financial, and  policy                                                                    
     issues and questions for  the legislature, the Governor                                                                    
     and department.                                                                                                            
Ms. Keppers testified  that the project had  been a valuable                                                                    
exercise and  that significant work had  been completed over                                                                    
the last  year. She  stated that  DOR recognized  that there                                                                    
were levels of information  that were necessary for informed                                                                    
decision making;  the department had captured  the necessary                                                                    
information  in  a  standardized format.  She  relayed  that                                                                    
standardizing  the  information  in  order  to  collect  it,                                                                    
report  it back,  and  analyses  it was  the  first step  in                                                                    
setting up a new revenue management system.                                                                                     
9:18:21 AM                                                                                                                    
Ms. Keppers discussed slide 4, "Accomplishments Spring 2011                                                                     
to Spring 2012." She stated that the accomplishments were                                                                       
as follows:                                                                                                                     
     ·  Gathered  data,  identified  information  needs  and                                                                    
     ·  Completed Industry  Information Catalogue  - Handout                                                                    
     ·  Focused on 5  Areas of oil  and gas  tax information                                                                    
     · Hosted 4 industry workshops to communicate goals.                                                                        
     ·  Requested and compiled 5-year  look back (2006-2010)                                                                    
        of capital expenditures (CAPEX) by high level                                                                           
     · Integrated, streamlined, and automated forms.                                                                            
     ·  Proposed work plan to obtain/report  detail data for                                                                    
     ·  Proposed work plan to integrate (sub ledger) oil and                                                                    
        gas accounting data into other information systems.                                                                     
Ms. Keppers stressed the DOR's responsibility to correct                                                                        
and clean-up any duplicate information in order to                                                                              
streamline the flow of data.                                                                                                    
9:21:51 AM                                                                                                                    
Ms. Keppers discussed slide 5, "Project Approach." The                                                                          
slide listed the following approach:                                                                                            
   DOR used and "integrated collaborative" approach among                                                                       
   DOR, DNR, AOGCC, industry, and other agencies to gather                                                                      
   current information.                                                                                                         
     ·  Identified current information received by DOR, DNR,                                                                    
        AOGCC and other oil and gas industry associated                                                                         
        agencies - "Industry Information Catalogue" -                                                                           
        Handout 1.                                                                                                              
     ·  Identified  and   cross   referenced   statute   and                                                                    
        regulation requirements of data received and NOT                                                                        
     · Reviewed past and current DOR information requests.                                                                      
     · Reviewed compliance level of responses.                                                                                  
     · Identified type and format of information submitted                                                                      
        by companies (PDF's, Excel Spreadsheets, etc) for                                                                       
        documents, graphs, charts, displays, narratives,                                                                        
        spreadsheet data files.                                                                                                 
9:21:53 AM                                                                                                                    
Ms. Keppers continued to slide  6, "Focus on Current Areas."                                                                    
She stated that  the areas that were the key  sources of oil                                                                    
and  gas tax  related information  and reporting  activities                                                                    
     · Production Forecast Reporting                                                                                            
     · Cost Forecast Reporting                                                                                                  
     · Monthly Information Reporting                                                                                            
     · Credit Application Filing                                                                                                
     · Annual Production Tax Return                                                                                             
9:22:31 AM                                                                                                                    
Co-Chair Stedman  noted that there  was a section of  SB 192                                                                    
that dealt at length with  the collection of information. He                                                                    
hoped DOR could  work with the committee  to draft agreeable                                                                    
language into the legislation.                                                                                                  
9:23:11 AM                                                                                                                    
Co-Chair  Hoffman felt  that audit  analysis and  time-frame                                                                    
for  receiving information  should  be included  in the  key                                                                    
areas.  Ms.   Keppers  replied  that  the   issue  could  be                                                                    
9:23:37 AM                                                                                                                    
Ms. Keppers  discussed slide 7, "Cost  Information Gathering                                                                    
Process." She discussed the following work plan:                                                                                
     · Conducted in house discussion and review.                                                                                
     · Developed CAPEX & OPEX Expense Category Lists.                                                                           
     · Conducted 4 workshops with industry.                                                                                     
     · Industry responsive in both active participation and                                                                     
        written comments.                                                                                                       
     · Developed CAPEX 5 year look-back of high level cost                                                                      
     · Proposed forward-looking more detailed CAPEX and                                                                         
        OPEX cost categories - Handout 2.                                                                                       
9:26:10 AM                                                                                                                    
Ms. Keppers looked at slide 8, "Data Assessment to Date":                                                                       
     · Data Assessment Project accomplishments, forms &                                                                         
     · 5 Year Look Back effort - compiled baseline data.                                                                        
     · Annual Cost Supplemental Information Report, rev 1.                                                                      
          o Effective for CY 2011 tax reporting due March                                                                       
             31, 2012                                                                                                           
          o Uses high level look back CAPEX categories                                                                          
          o Filed by producers and explorers                                                                                    
     · Near completion of Annual Production Tax Return                                                                          
Ms. Keppers  spoke to the  issue of audits. She  stated that                                                                    
DOR had a  6 year statute of limitation  to complete audits.                                                                    
She  explained  that  the process  was  large  and  complex;                                                                    
considering the 6  year time period for  completion, the tax                                                                    
division  should  not be  accused  of  being behind  on  the                                                                    
audits. She  reiterated that automatizing  and standardizing                                                                    
the  information,  collecting  it  in a  timely  manner  and                                                                    
putting it  into an easy  to read format would  expedite the                                                                    
auditing process.  She relayed that the  department had made                                                                    
some accomplishments  concerning form and processes  and had                                                                    
prescribed  what was  necessary  according  to statute.  She                                                                    
said that DOR had worked  with industry to standardize data.                                                                    
She furthered that some changes  that had been made would be                                                                    
effective  in the  current tax  reporting  year; the  annual                                                                    
cost supplemental information would  be categorized in the 5                                                                    
high level  areas listed on  Slide 9  and then added  to the                                                                    
look back effort.                                                                                                               
9:31:40 AM                                                                                                                    
Ms.   Keppers  discussed   slide  9,   "Capital  Expenditure                                                                    
     · Look Back Categories for 2006-2010:                                                                                      
          o Geological & Geophysical Work (G&G)                                                                                 
          o Exploration Drilling                                                                                                
          o Development Drilling                                                                                                
          o Facilities                                                                                                          
          o Other Capital                                                                                                       
     · High level categories were used as a result of                                                                           
        workshop discussions  with industry  to balance  the                                                                    
        department's information  needs  and the  industry's                                                                    
        ability to respond in a short time frame for 5 years                                                                    
        of historical data.                                                                                                     
     · Categorized capital expenditure data provided                                                                            
        represents   90%   of   company   reported   capital                                                                    
        expenditures relating to credits.                                                                                       
9:32:07 AM                                                                                                                    
Ms. Keppers addressed slide 10, "5 Year Look Back (2006-                                                                        
2012) Qualified Capital Expenditures":                                                                                          
     · Another aspect of the Data Assessment Project                                                                            
        included the 5 year  look back of  qualified capital                                                                    
        expenditures into  pre-defined  industry  compatible                                                                    
     · The pre-defined categories for the look back were                                                                        
        high  level  common   categories  used   across  the                                                                    
        industry to  serve  as  a  historical  baseline  for                                                                    
     · For CY 2012 and forward tax reporting the department                                                                     
        has  proposed  expanded  pre-defined  more  detailed                                                                    
        CAPEX and OPEX cost categories to the industry.                                                                         
9:33:14 AM                                                                                                                    
Ms. Keppers discussed slide 11, "Data Assessment Next 15                                                                        
        · Host  prospective  Cost Information  Workshops  on                                                                    
        · Update   Annual   Cost  Supplemental   Information                                                                    
          Report, rev 2.                                                                                                        
             o Effective for CY 2012 reporting due March                                                                        
               31, 2013                                                                                                         
             o Uses more detailed categories following                                                                          
               additional workshops - April 2012                                                                                
            o Filed by producers and explorers                                                                                  
        · Finalization of Annual Production Tax Return for                                                                      
          2012 reporting.                                                                                                       
        · Consolidating  standardized   forms  to  eliminate                                                                    
          duplicate reporting.                                                                                                  
             o Finalize oil and gas reporting processes,                                                                        
             o Compile 5 YLB historical cost data with 2012                                                                     
               cost data for analysis                                                                                           
        · Complete  the   foundation  and  basis   for  data                                                                    
          integration with  a Tax Revenue  Management System                                                                    
        · Refine proposed work  plan to initiate development                                                                    
          and  integration  of   standardized  oil  and  gas                                                                    
          accounting  information  into a  secured  database                                                                    
          once the  Tax Revenue Management System  ("TRMS ")                                                                    
          project plans decisions advance.                                                                                      
Ms. Keppers stressed that there was a great amount of                                                                           
baseline information necessary before the new system could                                                                      
be implemented.                                                                                                                 
9:36:14 AM                                                                                                                    
Ms. Keppers looked at slide 12, "Data Assessment Future                                                                         
July 2014 Forward."                                                                                                             
        · The  project has  defined what  we need  to do  to                                                                    
          organize the oil and gas accounting information.                                                                      
        · TRMS  project  needs   to  establish  the  project                                                                    
          implementation plan  in order  for our  project to                                                                    
          integrate into that system.                                                                                           
        · After   TRMS   project  implementation   plan   is                                                                    
          defined, the  next step is  to define how  the oil                                                                    
          and   gas    accounting   information    will   be                                                                    
          incorporated into TRMS and when it can begin.                                                                         
9:37:06 AM                                                                                                                    
Ms. Keppers discussed slide 13, "Benefits of Data                                                                               
Assessment Project":                                                                                                            
        · Proposed  reporting   definitions  and  automation                                                                    
        · Established  reporting  categories  for  qualified                                                                    
          capital expenditures categories.                                                                                      
        · Obtained     historical    capital     expenditure                                                                    
        · Developed requirements to report cost categories                                                                      
          going forward in 2012.                                                                                                
        · Identified potential for electronic data sharing                                                                      
          among associated agencies.                                                                                            
9:37:17 AM                                                                                                                    
Ms. Keppers continued to Slide 14, "Next Steps":                                                                                
        · Continued   interaction   with   stakeholders   to                                                                    
          complete identifying and defining more detailed                                                                       
          cost categories for both CAPEX and OPEX for 2012                                                                      
          tax reporting                                                                                                         
        · Complete standardization of forms, format and                                                                         
        · Automation of the standardizes forms                                                                                  
Ms.   Keppers  recognized   the  committee   maintained  the                                                                    
expectation  that  more  useful information  would  be  made                                                                    
available within the next year.                                                                                                 
9:38:06 AM                                                                                                                    
Ms.  Keppers   referred  to  Slide  15,   which  listed  the                                                                    
handouts.   She  stated   that   the  Industry   Information                                                                    
Catalogue was  a compilation of  information that  DOR, DNR,                                                                    
and AOGCC had received.  She discussed the spreadsheet, "Oil                                                                    
and  Gas  Information  Disclosure  in  Alaska".  The  column                                                                    
headers on the document signaled the following information:                                                                     
        · Type of Data                                                                                                          
        · Agency Receiving Data                                                                                                 
        · Statue/Regulation Authority                                                                                           
        · Agencies with which Data May be Shared                                                                                
        · Reason for Data Submission                                                                                            
        · Disclosure Timeframe                                                                                                  
        · Publication and Public Access                                                                                         
        · Form of Reported Info.                                                                                                
        · Data Provided By Source Agency                                                                                        
        · Additional Data Needs of DOR                                                                                          
 9:38:26 AM                                                                                                                   
Ms.  Keppers relayed  that  while  crafting the  spreadsheet                                                                    
workshops were  held with industry. Research  into DOR's tax                                                                    
accounting system had revealed  that the department had been                                                                    
receiving  the requested  general information.  She revealed                                                                    
that DOR would need to  request more specific information in                                                                    
regard  to lease  expenditures  and the  form  in which  the                                                                    
department  received  the  information   would  need  to  be                                                                    
standardized. She shared that  companies often believed that                                                                    
DOR was requesting redundant  information. She conceded that                                                                    
volumes of  information had been  given to DOR  by industry;                                                                    
however, the  information could  not be  categorized because                                                                    
it was not  in a standard form. She said  that it should not                                                                    
be  the role  of the  department to  decide where  the costs                                                                    
should be categorized. She trusted  that once the department                                                                    
defined the categories industry could make the decision.                                                                        
9:41:36 AM                                                                                                                    
Ms. Keppers  stated that DOR  had created a large  matrix of                                                                    
every piece  of industry  information that the  tax division                                                                    
had  received. She  stated  that  more specific  information                                                                    
concerning lease expenditures would  be gathered through the                                                                    
capital   and   operating   expenditures  (CAPEX   &   OPEX)                                                                    
9:42:34 AM                                                                                                                    
Ms.   Keppers  discusses   the  handout,   "Proposed  Master                                                                    
Expenditures Categories List" (copy  on file). She explained                                                                    
that when DOR resumed workshops  with industry in April 2012                                                                    
the list  would be reviewed  in detail.  Page 1 of  the list                                                                    
gave  the  CAPEX  expenditure  categories  and  accompanying                                                                    
definitions.  Working  through  the list  with  corporations                                                                    
would define  what information needed  to be  shared between                                                                    
DOR   and  industry.   Pages  2   through   4  listed   OPEX                                                                    
9:44:09 AM                                                                                                                    
Ms. Keppers  addressed the handout,  "SB 192,  Amendment 26,                                                                    
PIMS  Data Requirements  Comparison  to Currently  Collected                                                                    
Data by  Agency" (copy on  file). She explained  the handout                                                                    
detailed the comparison of what  was listed in the amendment                                                                    
and  what  was  currently  collected by  agency.  The  first                                                                    
column listed individual items that  may have been listed as                                                                    
a  single line  item  in the  amendment.  The second  column                                                                    
listed the information  that could be found  in the industry                                                                    
catalogue;  the third  column listed  the agency  collecting                                                                    
the information.                                                                                                                
9:45:11 AM                                                                                                                    
Co-Chair Stedman  wondered which  items on the  handout were                                                                    
proprietary. He spoke  to concerns that the  requests in the                                                                    
CS  involved issues  that were  more  complicated than  they                                                                    
appeared in the surface.                                                                                                        
Commissioner    Butcher   replied    that   DOR    had   the                                                                    
responsibility    be   very    careful   with    proprietary                                                                    
information.  He  said  that  the  majority  of  information                                                                    
requested in the CS was  currently being collected. He added                                                                    
that  the   determination  of  what  information   could  be                                                                    
released to  the public  would be  determined on  a case-by-                                                                    
case basis.                                                                                                                     
9:46:54 AM                                                                                                                    
Ms. Keppers  referred to the  center column on  the handout.                                                                    
She  stated that  it  had been  discovered  that four  items                                                                    
listed in  the amendment had  not been collected.   She said                                                                    
that   the  information   could  be   collected  with   more                                                                    
coordination with DOL&WD.                                                                                                       
9:47:20 AM                                                                                                                    
Ms. Keppers stated  that there was data  collected among the                                                                    
three agencies that was not identified in the amendment.                                                                        
9:47:35 AM                                                                                                                    
Commissioner Butcher  interjected that  slide 17  touched on                                                                    
the fact that 90 percent of  the data requirements in the CS                                                                    
were already  being collected by  the 3 agencies. Only  4 of                                                                    
the 35 data items were  not currently being collected, which                                                                    
could be fixed through  further coordination with DOL&WD. He                                                                    
expressed  concern  that  redundant  information  collection                                                                    
would  be financially  inefficient.  He said  that over  the                                                                    
last  year DOR  had been  the  agency compiling  all of  the                                                                    
information and  would expand the  search to the  handful of                                                                    
data items not currently being collected.                                                                                       
9:48:33 AM                                                                                                                    
Co-Chair Stedman pointed out that  the handout listed 5 data                                                                    
items that had not been collected.                                                                                              
9:48:41 AM                                                                                                                    
Co-Chair  Hoffman referred  to  page 2  of  the handout.  He                                                                    
queried  why   DOR  had  not  collected   information  about                                                                    
Production  Work   Programs  and  Production   Work  Program                                                                    
9:49:08 AM                                                                                                                    
Co-Chair  Stedman   added  that  no  information   had  been                                                                    
gathered concerning Exploration Work Program Budgets.                                                                           
Ms.  Keppers  understood  that  further  collaboration  with                                                                    
DOL&WD would  be necessary in  order to  collect information                                                                    
at the level DOR needed.                                                                                                        
9:50:05 AM                                                                                                                    
Co-Chair  Hoffman noted  that  the  missing information  had                                                                    
been  previously requested  by the  committee. He  expressed                                                                    
disappointment that the data had  not been made available to                                                                    
the state.                                                                                                                      
Commissioner  Butcher  agreed  to  provide  the  information                                                                    
following  future conversations  with  DOL&WD. He  explained                                                                    
that the DOR  had worked to identify all  of the information                                                                    
necessary in  order to evaluate revenue  issues. He admitted                                                                    
that the  department had failed  to consider  collecting the                                                                    
information prior to the last year.                                                                                             
Co-Chair  Hoffman wondered  if DOR  felt that  gathering the                                                                    
missing information was a  worthwhile pursuit.  Commissioner                                                                    
Butcher  replied that  the information  would have  value to                                                                    
the state.                                                                                                                      
9:51:40 AM                                                                                                                    
Co-Chair Stedman  asked if DOR  had been  communicating with                                                                    
DOL&WD  the   importance  that  the   requested  information                                                                    
reached  the committee  expeditiously. He  suggested that  a                                                                    
letter from the committee might expedite the process.                                                                           
Ms. Keppers testified  that DOR would work  with the DOL&WD.                                                                    
She said that  to date the department  had collaborated with                                                                    
DNR and AOGCC on the commonality of information.                                                                                
9:52:30 AM                                                                                                                    
Senator  Egan referred  to page  3  document. He  understood                                                                    
that DOL  was receiving  monthly reports concerning  Oil and                                                                    
Gas  Employment Information  and Training.  He wondered  why                                                                    
DOR did not have access to the information.                                                                                     
Ms. Keppers stated that the area  was one in which a gap had                                                                    
been  recognized.   She  assured  the  committee   that  the                                                                    
department recognized that more work  needed to be done with                                                                    
DOL&WD in the area of information sharing.                                                                                      
9:53:24 AM                                                                                                                    
Co-Chair Stedman  noted that  the section  of the  bill that                                                                    
spoke  to  the  issue  could   be  altered  to  reflect  the                                                                    
recommendations of  the department. He thought  the priority                                                                    
moving  forward  should  be  to focus  on  the  delivery  of                                                                    
information to  the committee. Commissioner  Butcher replied                                                                    
that the department would provide specific recommendations.                                                                     
Co-Chair   Stedman  added   that  the   committee  was   not                                                                    
interested  in redundant  information.  He highlighted  that                                                                    
the  concern centered  on  the flow  of  information to  the                                                                    
9:54:37 AM                                                                                                                    
Senator Olson  expressed concern regarding  abandoned wells;                                                                    
wells that  had been  abandoned or that  could no  longer be                                                                    
located.  He  understood that  most  of  the wells  were  on                                                                    
federal  ground,  but  wondered  why page  3,  item  (6)(A),                                                                    
reflected that there was  missing information concerning the                                                                    
9:56:13 AM                                                                                                                    
MERLIN  WIBBENMEYER, INDEPENDENT  CONTRACTOR, DEPARTMENT  OF                                                                    
REVENUE  (via  teleconference),   responded  that  the  item                                                                    
specifically referred  to the budget  information pertaining                                                                    
to    abandonment    wells,    leases,    production,    and                                                                    
transportation.  He stated  that industry  did not  normally                                                                    
provide the  level of detailed information  requested by the                                                                    
9:56:33 AM                                                                                                                    
Co-Chair  Stedman  understood  that DOR  requested  expected                                                                    
expenditure  estimations from  industry twice  per year.  He                                                                    
said that the most current  figures had been released to the                                                                    
Senate  Resources Committee  in Summer  of 2011.  He queried                                                                    
when the  information would be  introduced to  the committee                                                                    
for use  in future discussions. He  understood that industry                                                                    
could   have   confidentiality    issues   when   presenting                                                                    
information  to the  legislature, but  that the  numbers the                                                                    
committee  received were  in the  aggregate, which  made the                                                                    
data  difficult to  parse. He  assumed that  the data  would                                                                    
vary, but  thought it would  be beneficial to  the committee                                                                    
to have  a more fluid  flow of information from  industry in                                                                    
order  to   craft  sound  policy.   He  stressed   that  the                                                                    
substantial  number of  credits that  affected the  treasury                                                                    
each  year necessitated  open-ended appropriations  in order                                                                    
to pay the credits as they were submitted.                                                                                      
9:59:30 AM                                                                                                                    
Commissioner  Butcher  replied  that  the  department  would                                                                    
provide more frequent updates to the committee.                                                                                 
9:59:43 AM                                                                                                                    
Co-Chair  Stedman clarified  that receiving  the information                                                                    
in  January was  sufficient. He  expressed concern  that the                                                                    
facts  of the  data had  varied  from one  committee to  the                                                                    
next. He wondered how the problem could be alleviated.                                                                          
10:00:20 AM                                                                                                                   
Commissioner Butcher  replied that  the department  had been                                                                    
examining the  issue of inconsistent information.  He stated                                                                    
that  for decades,  the department  had been  too optimistic                                                                    
with production forecasts.  He felt that the  issue had been                                                                    
driven  by   overly  optimistic  industry   projections.  He                                                                    
pointed out that  there was a similar  concern regarding the                                                                    
capital  expenditure   forecasts.  He  explained   that  the                                                                    
industry's capital  expenditure forecasts had also  been too                                                                    
optimistic.   He  assured   the  committee   that  DOR   was                                                                    
researching the issue.                                                                                                          
10:02:01 AM                                                                                                                   
Co-Chair  Stedman wondered  if the  situation could  work in                                                                    
the opposite; could industry spend  more than anticipated on                                                                    
a year-by-year basis.                                                                                                           
10:02:35 AM                                                                                                                   
Commissioner Butcher replied in the affirmative.                                                                                
10:03:33 AM                                                                                                                   
Co-Chair  Stedman   asserted  that   the  issue   should  be                                                                    
frequently  discussed in  order to  track potential  capital                                                                    
expenditures in the future.                                                                                                     
10:04:24 AM                                                                                                                   
Ms.  Keppers  replied  that  the  forecast  information  was                                                                    
gathered twice  per year by  DOR's economic  research group.                                                                    
The first forecast  arrived in October and  was published in                                                                    
the  Revenue Source  Book the  first week  of December.  The                                                                    
spring forecast  was updated in  January or February  of the                                                                    
following year.                                                                                                                 
10:05:08 AM                                                                                                                   
Co-Chair  Stedman  emphasized  that   there  was  always  an                                                                    
interest in  the projected forecast and  the actual numbers.                                                                    
He shared  that the change  in the forecast was  of interest                                                                    
to the committee.                                                                                                               
10:05:22 AM                                                                                                                   
Ms. Keppers  agreed that the  forecast to  forecast analysis                                                                    
was  significant. She  said  that  the department  currently                                                                    
received the  information, but  not at  the level  of detail                                                                    
requested by the committee.                                                                                                     
10:05:40 AM                                                                                                                   
Co-Chair Hoffman noted that the  job of the committee was to                                                                    
set  tax policy  during the  legislative session.  He opined                                                                    
that  there  still  seemed to  be  missing  information.  He                                                                    
queried  the current  audit results  for Alaska's  Clear and                                                                    
Equitable  Share  (ACES), and  added  that  the audits  were                                                                    
unavailable as  far back  as 2007.  He argued  that informed                                                                    
decisions on  tax policy for  the State of Alaska  could not                                                                    
be  made  without  all  of  the  pertinent  information.  He                                                                    
wondered why  the administration would ask  the committee to                                                                    
make changes in  the tax structure without any  of the audit                                                                    
information.  He added  that the  issue  of abandoned  wells                                                                    
should  not  be  ignored  by   DOR.  He  stressed  that  the                                                                    
information  collected  by DOR  should  be  shared with  the                                                                    
Department  of  Environmental  Conservation (DEC),  and  the                                                                    
situation should  be under better control.  He declared that                                                                    
the  state   should  be  more  aggressive   in  seeking  the                                                                    
information necessary to craft sound public policy.                                                                             
10:07:55 AM                                                                                                                   
Commissioner Butcher  stated that  he agreed that  the state                                                                    
needed more  information. He  noted that  2006 was  the most                                                                    
difficult  year to  audit.  The state  had  switched from  a                                                                    
gross tax  to a  net tax, while  implementing dozens  of new                                                                    
regulations. He stated that DOR  was working on 2007 and was                                                                    
well  within statutory  guidelines. He  said that  providing                                                                    
the  information  expeditiously  was   a  priority  for  the                                                                    
department. He shared that when  the department received the                                                                    
returns from  the companies, a  desk audit was  performed to                                                                    
assure the  numbers looked accurate.  He stated that  a more                                                                    
detailed  audit was  later performed  in order  to establish                                                                    
the  accuracy of  the numbers  to a  higher degree.  He said                                                                    
that the department had not  noticed any large errors in the                                                                    
desk  audits. He  reiterated that  the  department had  more                                                                    
audits  that  needed   to  be  done,  but   was  not  behind                                                                    
10:10:50 AM                                                                                                                   
Co-Chair  Hoffman accepted  that the  department was  within                                                                    
the timeframe  provided under statute. He  asserted that the                                                                    
question  still  remained as  to  whether  the credits  were                                                                    
working  for the  state or  not. He  reminded the  committee                                                                    
that consultants  had testified that the  state had provided                                                                    
to too much  in tax credits; the committee did  not have the                                                                    
information  to  fix the  problem,  and  the department  had                                                                    
provided no recommendations.                                                                                                    
10:11:21 AM                                                                                                                   
Commissioner Butcher said that half  of the tax credits that                                                                    
were  paid   out  were  to   companies  that   were  already                                                                    
exploring,  and that  the department  would not  know for  a                                                                    
decade  whether production  had  increased as  a result.  He                                                                    
relayed  that  the  companies   themselves  could  give  the                                                                    
legislature   better  insight   as  to   what  the   credits                                                                    
accomplished than could DOR.                                                                                                    
10:12:08 AM                                                                                                                   
Co-Chair Hoffman  stressed that billions of  dollars for the                                                                    
state were  at risk.  He asserted  that an  understanding of                                                                    
weather the  credits were  working or not  should be  a high                                                                    
priority for the department.                                                                                                    
10:12:35 AM                                                                                                                   
Commissioner Butcher  agreed that it was  the responsibility                                                                    
of   the  department   to  provide   sufficient  information                                                                    
concerning  the issue  to the  committee. He  qualified that                                                                    
DOR was limited by an inability to foretell the future.                                                                         
10:12:48 AM                                                                                                                   
Co-Chair  Hoffman  probed  the  various ways  in  which  the                                                                    
legislature  could assist  the department  in gathering  the                                                                    
10:13:09 AM                                                                                                                   
Commissioner Butcher reiterated that  in 2006 the department                                                                    
had  been overworked  by the  implementation of  regulations                                                                    
for ACES  and the  Petroleum Production  Tax (PPT).  He felt                                                                    
that  the presentation  reflected  the level  of detail  the                                                                    
department could  provide concerning audits. He  assured the                                                                    
committee  the   department  would  provide   more  detailed                                                                    
information in the future.                                                                                                      
10:13:42 AM                                                                                                                   
Co-Chair Stedman  expressed concern that  the administration                                                                    
would  support  an  increase  in  oil  tax  credits  without                                                                    
considering   consultants   testimony   that   the   credits                                                                    
currently  extended  to  industry  were too  large  and  had                                                                    
caused  a negative  production tax  at high  oil prices.  He                                                                    
felt  that DOR  had not  provided a  reasonable analysis  or                                                                    
explanation for the credit increase.  He noted that when PPT                                                                    
was  crafted,  the  20  percent   capital  credit  had  been                                                                    
targeted  for increased  production,  but  had instead  gone                                                                    
into maintenance.                                                                                                               
10:16:07 AM                                                                                                                   
Commissioner   Butcher    solicited   additional   questions                                                                    
concerning the presentation.                                                                                                    
10:16:16 AM                                                                                                                   
Co-Chair  Stedman concluded  that there  would be  continued                                                                    
work  between  DOR and  DOL&WD  on  providing more  detailed                                                                    
information to the committee and the legislature.                                                                               
Commissioner Butcher agreed.                                                                                                    
10:16:59 AM                                                                                                                   
Commissioner  Butcher stated  that switching  from a  gross-                                                                    
system to a  net-system had allowed DOR to  collect a higher                                                                    
degree  of  data.  He stressed  that  many  agencies  worked                                                                    
together  to gather  the  important  information. He  shared                                                                    
that DOR was  learning to work with  each company's database                                                                    
10:18:07 AM                                                                                                                   
Co-Chair  Stedman   looked  to   page  1  of   the  Industry                                                                    
Information  Catalogue. He  asked  why  the Joint  Operating                                                                    
Agreements  were  listed  as "not  public  information."  He                                                                    
remarked  that   the  chairman   of  the   Senate  Judiciary                                                                    
Committee had  cited the  joint operating  agreements during                                                                    
public committee meetings.                                                                                                      
10:19:34 AM                                                                                                                   
Commissioner   Butcher   deferred   the  question   to   the                                                                    
department's tax division.                                                                                                      
10:19:49 AM                                                                                                                   
JOHN  LARSEN,  TAX  DIVISION,  DEPARTMENT  OF  REVENUE  (via                                                                    
teleconference), stated that  the joint operating agreements                                                                    
were  a  confidential   contract  between  working  interest                                                                    
owners.  He  explained  that there  were  several  types  of                                                                    
agreements:  joint operating  agreements and  unit operating                                                                    
agreements. He deferred further explanation to DNR.                                                                             
10:20:57 AM                                                                                                                   
Co-Chair  Stedman  believed  that   DNR  could  clarify  the                                                                    
difference  between  the  two   agreements.  He  noted  that                                                                    
questions  had risen  during  past  meetings concerning  the                                                                    
operating  agreements. He  referred to  the agreements  as a                                                                    
sort of "black box" which provided no answers.                                                                                  
10:22:00 AM                                                                                                                   
Senator  Thomas wondered  if the  process of  gathering data                                                                    
was  becoming more  streamlined or  more burdensome  for the                                                                    
10:23:16 AM                                                                                                                   
Commissioner  Butcher responded  that the  implementation of                                                                    
the  new  tax  management  system  would  require  increased                                                                    
labor. He relayed that collecting  the information would not                                                                    
be   labor-saving,   but   would   provide   more   detailed                                                                    
Senator  Thomas   thought  that  the   coordination  between                                                                    
departments and reformatting  of information would alleviate                                                                    
some of the redundant data.                                                                                                     
Commissioner Butcher  replied in the affirmative.  He shared                                                                    
that  Legislative Audit  had  highlighted  that the  archaic                                                                    
database  programs used  by the  department had  resulted in                                                                    
auditors  spending time  manually  entering information.  He                                                                    
believed  the  new  system   would  benefit  the  department                                                                    
10:24:34 AM                                                                                                                   
Co-Chair  Hoffman requested  the  time-frame for  completing                                                                    
the audits.                                                                                                                     
Commissioner Butcher replied that  a time-frame could not be                                                                    
10:25:14 AM                                                                                                                   
Co-Chair Hoffman wondered when  the department would be able                                                                    
to  provide  a  time-frame  in which  the  audits  would  be                                                                    
complete. He contended that the  information was critical in                                                                    
discussion about revisions to the tax structure.                                                                                
Commissioner  Butcher responded  that a  snap-shot of  where                                                                    
DOR  was in  the process,  and how  fast the  department was                                                                    
getting   caught-up,  could   be   provided.  However,   the                                                                    
department was  hamstrung by the  implementation of  the new                                                                    
10:27:32 AM                                                                                                                   
Co-Chair  Hoffman  asserted  that  the  committee  would  be                                                                    
negligent to  not make the  audits a priority. He  felt that                                                                    
the  committee   had  a  fiduciary  responsibility   to  the                                                                    
citizens of  the state to push  the issue of the  audits. He                                                                    
implored DOR  to establish a  time-frame and report  back to                                                                    
the committee.                                                                                                                  
Commissioner Butcher understood; however,  he could not give                                                                    
and accurate time-frame.                                                                                                        
10:28:58 AM                                                                                                                   
Senator  Olson  expressed discomfort  discussing  additional                                                                    
tax credits for the industry  without having seen the audits                                                                    
in question.                                                                                                                    
Commissioner  Butcher  replied  that  more  information  was                                                                    
always better.  He noted  that DOR  and the  legislature had                                                                    
much more information now than  when ACES and PPT were voted                                                                    
10:30:05 AM                                                                                                                   
Co-Chair  Stedman interjected  that  much  of the  currently                                                                    
available  information was  conflicting.  He  said that  the                                                                    
report  from  DOR when  HB  110  was introduced  had  raised                                                                    
numerous   concerns  on   many   levels,  particularly   the                                                                    
department's  direct involvement  in a  particular piece  of                                                                    
10:30:50 AM                                                                                                                   
Co-Chair Hoffman  referred back to  the proposal in  2007 of                                                                    
ACES by the  administration. He stated that he  had not felt                                                                    
at that time that  sufficient information had been provided,                                                                    
which resulted in his vote  against ACES. He reiterated that                                                                    
a  sound  decision could  not  be  made without  the  proper                                                                    
Commissioner  Butcher  replied   that  the  detailed  audits                                                                    
through 2012 would have a  minimal effect on the information                                                                    
policy  makers would  need to  make tax  decisions. He  said                                                                    
that  the   department  was  basically  going   through  and                                                                    
"dotting I's and crossing T's."  He argued that the detailed                                                                    
audits  would not  provide information  concerning necessary                                                                    
changes in the tax structure.                                                                                                   
Co-Chair  Hoffman maintained  that  he did  not have  enough                                                                    
information.  Commissioner Butcher  replied  that DOR  would                                                                    
work to provide all of the requested information.                                                                               
10:33:49 AM                                                                                                                   
AT EASE                                                                                                                         
10:44:20 AM                                                                                                                   
10:44:51 AM                                                                                                                   
WILLIAM  C.  BARRON,  DIRECTOR, DIVISION  OF  OIL  AND  GAS,                                                                    
DEPARTMENT  OF  NATURAL   RESOURCES,  addressed  a  question                                                                    
regarding  joint and  operating unit  agreements. He  stated                                                                    
that he did not have  the information, but would address the                                                                    
issue at a later date in a letter to the committee.                                                                             
10:45:35 AM                                                                                                                   
Mr.  Barron  presented  a PowerPoint  Presentation,  "Senate                                                                    
Finance Committee, 26 March 2012" (copy on file).                                                                               
10:45:47 AM                                                                                                                   
Mr. Barron discussed slide 2, "Outline of Presentation":                                                                        
        · Land Disposition                                                                                                      
        · Land Management                                                                                                       
        · Facility Capacity Access                                                                                              
10:45:52 AM                                                                                                                   
Mr. Barron continued  to slide 3, "Land  Management: Life of                                                                    
Lease,"  which illustrated  the  current  state process  for                                                                    
land  disposition  and  management.  Parties  could  acquire                                                                    
access to  state land  in two  ways: through  an exploration                                                                    
license, or through an area-wide  lease sale. Once the lease                                                                    
was  issues there  was a  primary term  for exploration  and                                                                    
during that time-frame parties were  expected to explore the                                                                    
land  to   prove  moveable  hydrocarbons.  If   no  moveable                                                                    
hydrocarbons were  found within the time-frame,  the acreage                                                                    
would  be made  available for  the next  lease sale.  In the                                                                    
event that  moveable hydrocarbons  were found, a  unit would                                                                    
be  formed under  careful  state  direction concerning  work                                                                    
programs  and  expectations  for  the first  five  years  of                                                                    
development.  He stated  that if  no significant  production                                                                    
occurred  after five  years, the  unit would  terminate, and                                                                    
the land would  be returned to the state for  resale. If the                                                                    
unit proved  successful it would  be deemed  a Participating                                                                    
Area (PA). He  noted that he leased  under discussion before                                                                    
the committee were in the PA stage.                                                                                             
10:47:47 AM                                                                                                                   
Co-Chair  Hoffman  wondered  why  there was  no  time  frame                                                                    
addressed  for  exploration  during the  primary  term.  Mr.                                                                    
Barron replied that the question  would be addressed further                                                                    
into the presentation.                                                                                                          
10:48:33 AM                                                                                                                   
Mr.  Barron addressed  slide 4,  "Alaskan Area-wide  Leasing                                                                    
System.":  He  stated  that the  area-wide  lease  sale  was                                                                    
primarily the  largest function of land  disposition used by                                                                    
the state, and covered areas where:                                                                                             
        · limited or no data exists regarding actual                                                                            
          resource potential                                                                                                    
        · some basins have shown production or promise                                                                          
Mr.  Barron cited  the North  Slope Foothills  as a  primary                                                                    
area of interest  in an active basin. He  continued that new                                                                    
rental rates would provide a  mechanism that would encourage                                                                    
timely  exploration and  development without  the additional                                                                    
administrative burden to State. He  said that during the new                                                                    
ten-year time-frame, the  leaseholder would retain exclusive                                                                    
rights  to explore  the  land. He  shared  that the  leasing                                                                    
system was a  product of U.S. Oil and Gas  law; it relied on                                                                    
the highest bidder and  was non-discriminatory. He explained                                                                    
that  the state  could  impose work  committees and  special                                                                    
terms  in  lease  sales (AS  38.05.035(h))  which  typically                                                                    
occurred when  the state was  aware of a  higher probability                                                                    
of known hydrocarbons in an area.                                                                                               
10:51:17 AM                                                                                                                   
Co-Chair Hoffman requested the  imposed work commitments for                                                                    
the  prior  5  years.  Mr.  Barron  agreed  to  provide  the                                                                    
10:51:41 AM                                                                                                                   
Mr. Barron  added that  the state  did not  typically impose                                                                    
work  commitments. Current  statute  required  the state  to                                                                    
provide expectations  to companies concerning he  lease, not                                                                    
vice-versa.  Mr.  Barrons  continued to  slide  5,  "Current                                                                    
Lease Terms."  He relayed that  in primary  producing areas,                                                                    
i.e.;  Cook  Inlet  and  the  North  Slope,  were  currently                                                                    
bidding out at a minimum of  $25.00 per acre. The rental for                                                                    
the  first seven  years was  $10.00 per  acre and  jumped to                                                                    
$250.00 per acre in years 8, 9, and 10.                                                                                         
10:52:11 AM                                                                                                                   
Co-Chair   Hoffman  questioned   if  the   rates  had   been                                                                    
established  under statute,  and queried  the date  of their                                                                    
last review. Mr. Barron replied  that the rates had not been                                                                    
established  under statute,  rather by  the Division  of Oil                                                                    
and  Gas.  The division  reviewed  the  rates on  an  annual                                                                    
basis. He clarified that the  terms in the presentation were                                                                    
first used in  2011 for the North Slope lease  sale. He said                                                                    
that between  the years  2002 and 2005,  the lease  term was                                                                    
for  seven years,  between  2006 and  2009  the term  varied                                                                    
between five years  and seven years; depending  on the area,                                                                    
and between 2009 and 2011  it varied between seven years and                                                                    
ten years. The  division had recognized over  time that five                                                                    
years did  not seem to be  enough time because of  the short                                                                    
drilling   and   exploration   season.  The   division   had                                                                    
established that  10 years was  a reasonable  maximum amount                                                                    
of time.  He said that the  jump to $250.00 per  acre at the                                                                    
eight  year  mark  gave  companies  the  choice  to  make  a                                                                    
business  decision  after  seven years  at  a  significantly                                                                    
lower rate. He cited the example on slide 5:                                                                                    
          Lease term expenditures                                                                                             
          (20 tracts/5,760 acres each)                                                                                        
             ¾Minimum bonus bid for land is $25/acre                                                                           
             ¾20 tracts at 5760 acres multiplied by $25                                                                        
               equals $2.88 million                                                                                             
             ¾Rentals: $10/acre equals $1.15 million each                                                                      
               year in annual rentals years 1 through 7                                                                         
             ¾Rentals: $250/acre equals $28.8 million each                                                                     
               year in annual rentals years 8 through 10                                                                        
10:56:05 AM                                                                                                                   
Mr. Barrons shared that the idea  was to get companies to do                                                                    
the work  within the first  seven years or pay  the elevated                                                                    
rate for years 8, 9, and 10.                                                                                                    
Senator Olson asked how the state's lease terms compared to                                                                     
terms on federal land. Mr. Barron replied that leases on                                                                        
federal lands were much lower.                                                                                                  
10:56:36 AM                                                                                                                   
Co-Chair Stedman concluded the meeting with housekeeping                                                                        
10:57:03 AM                                                                                                                   
The meeting was adjourned at 10:57 AM.                                                                                          

Document Name Date/Time Subjects
SB 192 12 03 26 M26 PIMS Data vs Currently Collected.pdf SFIN 3/26/2012 9:00:00 AM
SB 192
SB 192 12 03 26 SenFin AK Industry Information Catalogue V1.pdf SFIN 3/26/2012 9:00:00 AM
SB 192
SB 192 12 03 26 Proposed Master Expenditure Categories List V1.pdf SFIN 3/26/2012 9:00:00 AM
SB 192
SB 192 12 03 26 SenFin Data Assess Project V11 Draft (BT).pdf SFIN 3/26/2012 9:00:00 AM
SB 192
SB 192 032312 Response to 030512 Questions.pdf SFIN 3/26/2012 9:00:00 AM
SB 192
SB 192 DNR Presentation 032612.pdf SFIN 3/26/2012 9:00:00 AM
SB 192